Microsoft's shares soar in Q4, sparking a debate: Is it still worth buying MSFT stocks?
Microsoft (MSFT) has made history by becoming the second company, after Nvidia (NVDA), to reach a market capitalization of over $4 trillion. This impressive milestone comes after a strong Q4 earnings report that beat expectations on both revenue and earnings.
The tech giant reported a fiscal Q4 revenue of $76.4 billion, outpacing the previously set range of $74.7 billion to $75.8 billion. Net income grew 23.6% to $27.2 billion, and EPS grew 23.7% from the year-ago value to $3.65. MSFT stock surged 9% in extended trading after the Q4 earnings release, and continued to climb, reaching a session high above $555.
Microsoft's Intelligent Cloud segment posted $29.9 billion in revenue, a 26% increase from the year-ago quarter. The More Personal Computing division delivered $13.5 billion, a 9% year-over-year (YOY) jump. Productivity and Business Processes brought in $33.1 billion, up 16% YOY. Notably, Microsoft's AI assistant, Copilot, now has 100 million monthly active users.
However, Microsoft is not without its challenges. The company continues to face data center infrastructure constraints as it scales up to meet the rising demand for artificial intelligence (AI). This requires enormous capital expenditure on data centers, part of a $364 billion investment forecast for 2025 by major tech firms, including Microsoft.
One of the main challenges is managing the rising capital investment in massive AI-focused data center expansion. Microsoft is investing heavily in AI infrastructure, including custom silicon like AI-optimized GPUs, to support Azure AI services, which are reported to have surged 157% YoY and contribute significantly to revenue growth.
Another challenge is maintaining quality enterprise support amid internal workforce reductions. Microsoft has made notable workforce reductions, including cutting roles that traditionally supported complex enterprise systems, to focus on scalable AI-driven solutions like Copilot. However, while AI tools improve productivity in user-facing scenarios, their ability to replace human engineers in diagnosing complex, mission-critical hybrid system issues remains limited.
This shift drives enterprises toward seeking third-party Microsoft support to supplement these gaps. Thus, Microsoft faces the dual challenge of cost-effectively scaling AI-powered data center infrastructure while ensuring enterprise clients continue to receive the expert support necessary to operate complex hybrid environments reliably.
Looking ahead, analysts expect Microsoft's Q1 2026 EPS to rise 10.3% YOY to $3.64. The Street-high target for MSFT stock is $675, implying a potential upside of 29% from current levels. Microsoft's annualized spending could exceed $120 billion, a 36% increase year-over-year (YOY).
These challenges also highlight the increasing demand for real-time AI applications, requiring innovation not only in hardware but in software and workflow integrations for industries like manufacturing and aviation. The massive AI data center spend has broader economic impact, surpassing US consumer spending in GDP contribution, underscoring the scale and urgency of infrastructure expansion.
Microsoft has increased dividends for 20 years in a row and currently pays an annual dividend of $3.28, yielding 0.62%. The next quarterly payout of $0.83 is scheduled for Sept. 11.
In conclusion, Microsoft's strong Q4 earnings and market capitalization milestone are a testament to its success in the tech industry. However, the company faces challenges in scaling up its AI and data center infrastructure while maintaining quality enterprise support. These challenges are not insurmountable, and Microsoft's continued investment in AI infrastructure and workforce suggests a commitment to meeting the demands of the AI-driven economy.
Microsoft's continued investment in AI infrastructure, such as custom silicon like AI-optimized GPUs, signifies a significant focus on technology in expanding Azure AI services, contributing to revenue growth. As the company scale up its AI-focused data centers, managing the rising capital investment and ensuring enterprise clients continue to receive expert support will be essential for financial success.
